|Learn how you might set up and use a fee-for-service structure to develop dependable funding for your organization over the long term.|
What is fee-for-service?
What are the advantages of fee-for-service?
What are the disadvantages of fee-for-service?
Who might pay for your services?
How do you develop a fee-for-service structure?
How do you sustain a fee-for-service operation?
Suppose that, instead of a non-profit, you were a small business. How would you operate?
If you were like most small businesses, you'd be trying to sell your services in the marketplace at a price that was not so high that consumers wouldn't buy, but high enough so that you could make a profit.
Well, surprise! Whether you realize it or not, you are a small business. But if you're like many non-profits, you may have restrictions on what you can do that most small businesses don't have to worry about. Funders may tell you exactly what you can spend money on and it may not be exactly what you need. There may not be enough money to do what you need to do, or funding may not be available for programs that you feel are necessary for the community. Wouldn't it be great if you could actually operate like a small business, and use your income in whatever way made the most sense for your organization?
One way that you could achieve this for at least part of your income is to establish a fee-for-service structure that allows you to charge for what you do. Many non-profits use such a structure either as a major source of income, or as a supplement to other funding. This section will help you understand why and how you might set up and use a fee-for-service structure to develop dependable funding for your organization over the long term. It will give you some ideas about what fee-for-service actually entails, who your customers might be, some advantages and pitfalls of this kind of operation, and how to set up a fee-for-service structure and sustain it over time.
What is fee-for-service?
In its simplest terms, fee-for-service is just what it sounds like: fees paid in return for services delivered. Those services, however, could range from what your organization actually does in fulfillment of its mission (substance abuse treatment, adult literacy instruction, child care, etc.) to training providers or others to consulting with businesses and agencies. The fee-for-service structure you adopt could be very simple - charging a set rate per unit of service (per hour, per person, per workshop, per place in a program, etc.) -- or much more complex -- setting up a for-profit corporation, for instance, to make money on fee-for-service and channel it to your non-profit organization.
Regardless of the services involved or the structure through which they're provided and paid for, the goal is the same: to provide income -- particularly income that can be used in any way you choose -- to the organization over the long term.
What are the advantages of fee-for-service?
As we'll discuss below, setting up a fee-for-service operation involves a fair amount of work and thought. Why would you want to go to the trouble? There are several answers to this question:
- It could increase your income substantially. Grant funds often barely pay for the cost of providing services. Sometimes they are scant enough that the organization may end up subsidizing its own work out of funds that could be used instead for improvement or expansion. Fee-for-service guarantees that you'll be paid reasonably for what you do.
- You actually get paid directly for everything you do, thus confirming the value of your services. This arrangement also makes it easier to plan both your finances and your program, because you can be sure that your payment will support what you want to do.
- Fee-for-service money comes without strings attached. You can use it for whatever you choose: operating expenses, cash reserve, capital outlays. You don't need anyone's permission to spend it, and there are no time limits on spending it (no rushing around to get the money spent by June 30 or December 31, when your financial carriage turns into a pumpkin).
- It doesn't stop you from getting and using other funding for particular purposes. You can still continue to be funded from other sources as well, as long as you abide by funders' rules and don't "double-dip," i.e. fund the same person or service twice from two different sources.
- If there's a market for what you're selling, fee-for-service money has no end. You can continue to provide services and get paid directly for them for as long as your organization exists.
What are the disadvantages of fee-for-service?
While a fee-for-service structure can eventually assure you of long-term, steady income, it comes with its own set of difficulties as well.
- It requires your organization to institute another level of fiscal management. Especially if you have public funding, you have to be careful to keep track of your fee-for-service income separately so that you can document that your public funds have been spent correctly. In addition, there are some basic business practices that you have to adhere to:
- You have to be able to show your customers that you've delivered the services you were paid for.
- You have to keep track of work that you can bill for, and of accounts receivable (i.e. the money that you're owed for services you've provided but not yet been paid for).
- You have to do the billing regularly.
- You have to make sure, especially with participants, that everyone gets a receipt for payment, and that you keep careful track of what's been paid. The reason this is particularly important for participants is that, especially if they're low-to -moderate income, they may pay in cash, and thus have no automatic record (such as a cancelled check or credit card bill) to prove they've paid.
It's essential to consider your fee-for-service structure beforehand to confirm that it will pay its way, and more. If you're taking in $20,000 a year, and you have to hire a $20,000-a-year staff member to administer the operation, all you've gained is a headache. Be sure that your gains, financial and otherwise, are worth the effort.
- It requires you to be especially careful about the regulations of your funders. Many public funders, for instance, may not allow you to mix participants being sponsored by public funds with other participants paid for by third parties or by themselves. Some public funders will only fund organizations whose services are free to all participants. You need to be sure you know the rules and understand how to follow them so as not to jeopardize your other funding.
- You have to market your services. Unless you're nationally famous and constantly in the news, you have to let potential customers know who you are, what you do, and why they should hire you to do it. That may mean a lot of work (see the discussion on marketing plans below), and it has to go on forever, or for as long as you continue to run a fee-for-service operation.
- If you're charging participants directly, you may scare some away because of the cost, especially if they're already nervous about plunging in. You may also have to deal with charges of unfairness, because some people are paying more than others, or because some are paying and others -- who are paid for by third parties or eligible for public funding -- are not.
- You may have to chase down money that's owed, or wait long periods to be paid. That's not only a pain, but it can also affect your relationship with the community. If you're trying to collect money owed by participants, you may embarrass people who are already embarrassed by not being able to pay, and ruin your image in the target population as well.
Who might pay for your services?
There are a number of possible customers at whom you might aim a fee-for-service operation. These range from third parties who might pay for services for others to the direct recipients themselves to recipients of such services as training and consulting.
Third parties who desire services for people in whom they're interested
- Employers who want services for their workforces. Some employers are willing to offer various kinds of services to workers as part of their benefit packages, or because it benefits the business. These services might include:
- Employee assistance programs, such as: substance abuse treatment, counseling and psychotherapy, wellness and preventive health maintenance, parenting, etc.
- Education: English as a Second or Other Language (ESOL), basic skills (reading, writing, math, computer literacy, and/or GED classes), job-related instruction.
- Workshops in areas such as problem-solving, interpersonal skills, and working as a team.
- Child care.
- Other organizations and agencies whose participants need your services. Services in this situation might include those listed in relation to employers, and such others as:
- Employment readiness: instruction in resume writing, interviewing, getting and keeping a job, relations with fellow workers, etc.
- Employment training: specific skills and knowledge for particular jobs.
- Job placement.
- Medical services: prenatal counseling and care, nutrition, regular medical care, inoculations, etc.
- Early childhood education.
- Recreational services for children and youth.
- Court systems, jails, and probation offices. The courts and correction system often require offenders to undergo treatment or participate in services instead of, or in addition to, incarceration. You may be able to offer services similar to those described above, and including also:
- Anger management
- Counseling aimed at sex offenders, child sexual abusers, domestic abusers, etc.
- Literacy and GED instruction in both English and Spanish.
- Substance abuse education.
- Services for the families of those in prison.
- Victim/witness counseling and therapy.
- Mediation of potential court cases -- particularly small claims, summary process (eviction), landlord/tenant and personal disputes, etc.
- School systems. Although we often think of school systems as completely self-contained, there are, in fact, many things they can't do for themselves, or find it easier to pay other entities to do. Among these might be:
- Workshops for teachers in such areas as conflict resolution, basic counseling skills, and classroom management.
- Training for teachers in specific, non-academic curriculum areas: violence prevention, substance abuse, child development, health issues.
- Direct services to students, including counseling, training and supervision of peer mediators and peer tutors, after school programs, tutoring, arts enrichment, etc.
- Workshops for students and parents in conflict resolution and mediation, substance abuse, child abuse and sexual assault, study skills, etc.
Direct recipients of services
You may decide to charge those to whom you actually provide services. Most organizations that do this use a sliding fee scale, which charges people according to what they can afford. There are suggestions about how to construct a sliding fee scale later in this section, as well as an example of what an actual sliding fee schedule might look like.
Charging participants only makes sense where it won't drive potential participants away, and where most can afford to pay. A real-life example shows why this is true.
The adult literacy program the author worked with started out to support itself in 1984 by charging students. The organization devised a sliding fee scale ranging from $20 a week down to $2 a week for unlimited hours of instruction. The idea was that if we got 40 students a week, we'd make enough to pay for two salaries, rent, and materials. It all made sense at the time, and seemed to be a way not to become dependent on public funding, with all the strings attached to it.
Unfortunately, we had not taken into account the fact that most people who lacked basic skills were also unable to find jobs that paid well. Within only a few months, there were in fact 40 students in classes most weeks. The majority of them, however, were closer to the $2 end of the sliding scale than to the $20 end. The few who paid top dollar often grumbled that they were being cheated because others weren't paying their way.
Needless to say, the original idea of supporting the organization largely by student fees didn't work because most students simply didn't have the money to pay. In addition, the sliding scale made for resentment and division among students. Fee-for-service in this case was -- and caused -- more trouble than it was worth.
Parties who desire consulting, rather than direct, services
If you, as an organization, have particular knowledge and skills, you may be able to offer these as consultants to the third parties mentioned above, as well as to local, state, and national agencies and organizations.
Some of the many areas which consultants are often asked to address are:
- Environmental issues.
- Education at all levels.
- Organizational development.
- Human relations/racism/diversity.
- Participatory management.
- On-the-job health and safety.
- Training of employees, staff members, etc. in areas in which the organization hasn't the capacity to do its own training.
If you are able to do it, consulting has many advantages. It pays well, usually far better than simply providing services. It gives you a chance to use and pass on what you have learned. Also, it spreads the name and reputation of your organization, thus opening the way for more consulting or other fee-for-service opportunities, and strengthening your ability to fulfill your mission.
How do you develop a fee-for-service structure?
There's more to establishing a fee-for-service operation than buying a cash register and waiting for the hordes of customers to beat a path to your door. You have to approach it exactly the way a for-profit business would: by conducting market research, coming up with and carrying out a marketing plan, setting reasonable prices, and creating an administrative structure to support your business. Only after completing these tasks are you likely to get customers and to be ready for them.
Conduct market research to find out whether there is a market for your services.
This means something different from finding out whether there's a need. There may be lots of people in the community who need your services -- adults who don't have basic skills, or employers who don't deal well with the diversity of their workforces, for instance -- but if they don't see it as a need, or if they or third parties aren't willing to pay for your services, then there's no market for them.
What matters is not just whether there's a need, but whether there's a demand -- people who want your services, and are willing to pay for them. Although there has to be a need before there can be a demand (at least in most circumstances -- we'll leave TV advertising out of this), it's the demand that creates the market. And it's the level of demand that market research has to find.
Big corporations have whole departments -- hundreds or even thousands of people -- whose only job is market research. They conduct national polls of thousands of people, run focus groups, target their research to particular age groups and geographic areas, and crunch huge numbers in powerful computers, all to decide how best to sell a new underarm deodorant.
- You obviously don't have the capacity of a large corporation, but there are some steps that you can take in your community to find out whether there's a market for your services.
- Meet, individually and in groups, with employers, directors and staff of other agencies and organizations, probation officers, the target population, or other potential customers to find out what services they want. If you can, talk to people who don 't know much about your organization as well as those with whom you already have dealings. Focus on them, not on what you're planning.
- Find out whether the services your contacts are looking for are already available from other sources and how well used they are.
- Learn about other organizations that charge for their services. How do they operate? Are they getting any business? How do they market their services?
- If appropriate, meet with members of the target population to find out whether they'd be willing to pay for services, if that were necessary in order to continue them.
- Try to learn some history: did other organizations in the community attempt what you're thinking about, and how successful were they? Is there bad feeling about fee-for-service as a result of a past situation you haven't been aware of? The answers to such questions may be an important part of your research.
- Be honest with yourself about the results of your research. All too often, organizations conduct market research and then ignore their findings in favor of doing what they wanted to in the first place. If everything points to fee-for-service not working, it probably won't work.
Every new program or direction involves some risk. The key here is determining whether the risk of trying fee-for-service is reasonable or unreasonable. If all the signs point to failure, then the risk involved is probably too great. If no one 's been able to do this successfully before, but there's evidence that attitudes and possibilities have changed, then the risk may be worth taking. You have to do your research well and look carefully -- and objectively -- at the results before you decide what to do.
Develop and implement a marketing plan.
If your research tells you to go ahead, the next step is to come up with and carry out a plan to sell your services. That means carefully choosing the services you'll offer, and making sure that people know what your services are and why they'd benefit from using them. If you haven 't charged for these services in the past, it also means letting people know that you are charging now, and why.
Choose the services you'll market
Your research should tell you what services the community will be willing to pay for. If there's no call for consulting services, trying to sell them is likely to end in failure. If it's clear that businesses aren't willing to pay for services for their employees, it makes no sense to offer those services. Try to match what you're offering with what your research tells you that people and organizations want.
You also need to make decisions about what demands you're willing to meet. If a business, for instance, asks you to do something that's within the scope of your work, but goes against the philosophy or mission of the organization, you need to be honest -- with yourself and with potential customers -- about what you will do and what you won't.
The adult literacy program referred to earlier, for instance, provided workplace services to employees. It always refused, however, to provide literacy instruction that was only job-specific, maintaining (a) that literacy skills were core skills that made all workers more competent and productive, and (b) that equipping a worker with only the basic skills that allowed him to do a particular, low-skilled job consigned him permanently to that level of employment. The program's mission was to empower people and communities, and it made clear that it wouldn't do work that denied that mission.
Marketing to the target population
If you're going to be charging participants, especially for services that they've gotten free up until now, how are you going to inform them that services aren't free, and how are you going to justify that fact? Since this section is about institutionalization, justifying the new situation should be straightforward: it's necessary to continue the service in the community indefinitely. You are, in fact, making this change so that you can keep operating, regardless of the state of funding or the political situation. Most people will understand and respond to that.
Another concern here is assuring current and potential participants that they won't be denied services if they have little or no money. If you make clear that no one will be charged more than she can afford, and that no one will be turned away for lack of funds (assuming this is true), that will help greatly. It's probable that, no matter what you do, you'll lose some people because of the fee, but you can keep this number to a minimum if you're honest and thoughtful in presenting the situation.
- If you're already successfully recruiting among the target population, your procedure probably won't change much. There are a number of other Community Tool Box sections that discuss reaching the target population (Handling Problems and Crises in Communication and Establishing an Adult Literacy Program, to name two). Briefly, to reach people with your message, you should remember some basics:
- Put your message where people will see it: in their neighborhoods and stores; through fliers and posters; on their favorite radio and TV stations; through the publications they read.
- Use language that your target audience will understand: plain, uncomplicated English or the first language(s) of the community.
- Get the help of community members or others -- clergy, local officials, etc. -- whom the target audience knows and trusts.
- Establish a presence so that the folks you're trying to reach know who you are.
- Make it easy for people to contact you. A 24-hour answering machine, tear-off phone numbers on fliers and posters, or a memorable phone number can all increase the chances that you won't miss anyone.
When you discuss your services with potential participants, be sure to be clear and honest about payment. Explain exactly what your charges are, what the exceptions are, how they can handle it if they haven't enough money, etc. Don't be embarrassed by the subject: it's important to them and it's important to you.
Marketing to third parties or to potential consulting customers
The most important part of marketing to employers, organizations, and other entities is making them aware of who you are and what you do.
There are many ways to do this:
- Direct mail. Develop a brochure, letter, or other printed material you can send out in the mail. It should include, in a few sentences each, a description of the services offered, a reason for them to purchase the services, and a description of your organization. It can be sent as a blanket mailing to businesses, schools, agencies, etc. (The Chamber of Commerce mailing list might be helpful here: you'll have access to it if you're a Chamber member.) You could also target your mailing to particular types of, or even specific individual businesses or other organizations, if you know who'll be most likely to take advantage of what you have to offer. If you have your own mailing list, you might target entities already on it.
- Personal contact. You could meet in person with contacts or arrange presentations at targeted businesses and organizations.
- Intermediaries. You could ask third parties (perhaps members of the community who've used and been pleased with your services) to help you establish contacts with potential customers.
- E-mail. You could use the same brochure or letter developed for direct mail, sent as an attachment or pasted into the body of the text. Again, a Chamber of Commerce or other e-mail list would be useful here.
- Website. Either a new or existing site could be used to advertise your services. The great advantage of this medium is that you could put up as much material as you liked, including pictures, news articles, statistics, etc. The major disadvantage of a website is that you have no way of getting people to visit it. It's probably best used in combination with other methods.
- Telephone. You could phone personal contacts at a targeted list of businesses and organizations.
- Paid advertising. You could use the media to get the message out. Ads might include statements from satisfied customers, participants, etc.
It's probably ideal to use a combination of some or all of these methods in order to try to reach as many people and organizations as possible in as many ways as possible. As with any campaign of this type, there's no substitute for personal contact. You need to establish a personal relationship with someone in every organization or business you are or might be working with, so that neither you nor your customer is dealing with a faceless entity. It's much easier to address problems, iron out issues and disagreements, and to work together effectively if the contact between you is personal.
Determine and set fair prices for your services.
Probably the best way to determine a fair price for third parties is to investigate what similar services cost, both in your community and in other communities of comparable size and affluence. You might also check on the rates that state and local agencies pay for such services. You can always decide to charge less than others do, but it's probably unwise -- and unfair -- to charge more.
If you're charging participants directly, the fairest way to determine their costs is usually through the use of a sliding fee scale. This determines payment by income, often through figuring in family size as well. Thus, a single person with a yearly income of $35,000 might be at or near the top of the scale, while someone with a family of five and a yearly income of $20,000 or less might be at or near the bottom.
To construct a sliding fee scale, start by deciding what the highest payment level should be. What could someone with a particular level of income reasonably afford, and what should she get for her money? Should the top payment be as high as what you charge third parties for the same services? Should you take into account what people are willing to pay for other things in their lives -- cable TV, for example?
The next step is deciding on the bottom payment. It shouldn't be zero. If you're asking people to pay something, it's actually somewhat insulting to imply that an individual can't come up with anything at all, even if it's only a dollar a week. Participants with very little money may actually value the opportunity to show their ability to pay something.
This can also be a two-edged sword. People may, out of pride, overestimate or overstate their ability to pay, putting themselves in a difficult situation. They may feel, if they can't pay in a particular week or month, that they have to forego services for that time. Or they may find themselves further and further behind, and simply quit out of embarrassment or out of despair that they'll never get caught up.
Assuming that providing services is the reason for your organization's existence, it's important that participants understand that they can renegotiate their payments if there's a problem. The point of creating a sliding-scale fee schedule is so that people won't have to estimate what they can pay, but can resort to a formula which, in most cases, won't overcharge them. (If it does, for any reason, they should understand that it can be adjusted to their needs.)
Once the high and low ends of the scale are fixed, it should be fairly easy to come up with steps in between, and to adjust them according to income and family size.
Example of a sliding fee schedule: Columns are yearly income. Rows are family size. Range is in dollars per week
Create an administrative structure to handle your fee-for-service operation. Depending upon how much of your whole operation is fee-for-service, the nature of your services, and the restrictions of your other funding, this could either be a very simple or a very complex issue. It may be as simple as making small adjustments in your bookkeeping software (if your books are computerized) to track fees, or as complex as creating a whole new set of books to handle fee-for-service business, or even hiring a new part-time or full-time employee to oversee it.
The pieces that the administrative structure has to handle are:
- Keeping track of all the financial details relating to the fee-for-service part of your organization: income and expenses, billing, payables and receivables, etc.
- Making sure that fee-for-service work isn't conflicting with the requirements of other funders -- and vice-versa -- and that you're not collecting twice for any work you do.
- Ensuring that any work contracted for is completed effectively and on time.
- Maintaining contact with current and potential third party customers, and seeking out new ones.
- Completing any necessary reports or other paperwork.
- Being aware if payment issues are affecting service to paying participants, and negotiating with them if that's the case.
One possibility, mentioned earlier, is creating a for-profit corporation that would perform all fee-for-service work, and channel money into the non-profit. This can be a great idea, but it requires a lot of time with lawyers and accountants, and it should only be considered if (a) you have the resources to sustain such an operation until it starts making money, and (b) you expect it to make a LOT of money in the long run. Otherwise the time and effort necessary to start it up, as well as the other difficulties of running a small for-profit business, make it far more trouble than it's worth.
How do you sustain a fee-for-service operation?
Even once your operation is up and running, it won't sustain itself. You need to continue to seek out customers, advertise your services to the target population, and to examine what you're doing in order to improve and expand it.
- Continue to update and implement your marketing plan. Your marketing plan may be working well, but you have to assume that conditions will change over time. You want to be ready to change your plan as demand changes, so that you can continue both to deliver services to those who can benefit from them, and to generate income for the organization. You have to look at your plan regularly - annually is usually about right - to reassure yourself that it's still appropriate, or to adjust it to a changing climate.
- Maintain personal contacts at businesses and organizations. Even though you may have done business with an entity for years, you have to keep in regular contact. Institutional memories tend to be short because positions shift and people move on. Your contact at a particular business may be transferred to Manila, or may leave to become a fly-fishing guide in Wyoming.
If you lose a personal contact at a business or organization that's a past, present, or potential customer, you need to develop a new one there. Personal contact is the backbone of any fee-for-service operation.
- Continually evaluate what you're doing, in terms of both how well you 're accomplishing your organization's purposes (mission, philosophy, long term goals, etc.) and how well you're meeting the needs of those -- participants and others -- who are paying for your services. There are several elements to this kind of evaluation:
- It's important to keep services as effective as possible both for fulfilling your mission and for maintaining and increasing the value of your services in the marketplace. Thus, you can use an evaluation to document and advertise your effectiveness.
- At the same time, you can use an evaluation to highlight areas where you could improve, or to think about different and potentially better ways to do your work. As we discuss in many places throughout the Tool Box, a successful organization is dynamic, always looking for ways to change for the better. Regular evaluations can help maintain that dynamism.
- Another area to evaluate is the effect of fee-for-service on participants. If they're paying themselves, are you gaining or losing participation as a result? Are you losing potential participants because of cost, or does paying make participants more diligent? It's important and helpful to answer these kinds of questions.
- If participants themselves are not paying, are some who aren't being subsidized passed over in favor of others who are paid for? Are you taking on more participants than you can serve effectively simply because they're paid for?
- Administrative and fiscal structures and procedures should be revisited regularly, and streamlined as much as possible. Fee-for-service shouldn't be a drain on the organization: if it is, you shouldn't be doing it.
Regularly evaluating what you do -- and acting on the results -- can keep your fee -for-service program on track and flourishing, and can also help the rest of your operation.
Providing direct or consulting and training services for which you're paid directly by third parties -- businesses, organizations, etc.-- or participants can bring in money that your organization can use in any way it chooses, and can go on throughout the life of the organization. A fee-for-service operation can be an important contributor to your organization's continuity and financial stability.
Developing and maintaining a fee-for-service structure takes some effort, however. You have to create the fiscal and administrative capacity to handle the operation and keep it separate from, and out of conflict with, your other funding. If you're charging participants directly, you have to anticipate and deal with the issues that may arise when they have difficulty paying, or are scared away from the service by the prospect of a fee. Most importantly, you have to engage in market research, and devise and carry out a marketing plan... forever. Finally, you have to sustain the operation through regular evaluation and change to increase the effectiveness of your services and to meet the demands of the market.
Fee-for-service is a lot of work, but it can provide you with a long-term source of money that you can use any way you want to, and help you institutionalize your organization.
Questions and answers about legal issues relating to non-profit fee-for-service arrangements.
Business Planning Tools for Nonprofits – a guide from SCORE (Service Corps of Retired Executives).
Fiscal Issues and Geeky Stuff: Program Service Fees For Non-Profits - A blog explanation of non-profit fee for service.
“Funding Your Future: Establishing Fee for Service Programs in Non-Profit EMS Agencies.” Guide from the Commonwealth of Virginia Office of Emergency Meidcal Services.